Shares of Summit Materials (NYSE:SUM) took off on Thursday, closing more than 14% higher on the day. Driving up the cement and aggregate-material producer's stock price was a report that a Colombian company was interested in a potential merger.
Reuters reported that Colombian industrial conglomerate Groupo Argos had approached Summit Materials about a merger. The company would combine its subsidiary Cementos Argos with Summit in a deal to bolster its U.S. footprint. A transaction would create a larger-scale materials company that would have a stronger competitive footprint in the U.S. concrete and aggregates market.
Summit Materials is no stranger to mergers and acquisitions (M&A) activity, having completed 70 deals throughout its history. However, CEO Tom Hill did state on the company's recent first-quarter conference call that, "with respect to acquisitions, our pipeline has slowed a bit." That's due, in part, to "our leverage," which is leading the company to be "very cautious in our acquisition spend." That lack of acquisition prospects, as well as the firepower to make deals, seems to have made Summit an attractive acquisition candidate for the deeper-pocketed Groupo Argos.
It's unclear if an agreement between these two companies will materialize. Because of that, Summit Materials could quickly give back today's gains if the talks don't go anywhere, especially since the company has a large debt load that's currently weighing it down. Given that skewed risk-reward, investors shouldn't chase this stock.